Aggregates Product Line Gross Margin Improves 180 Basis Points; Consolidated Gross Margin Expands Despite Lower Revenues
Aggregates Product Line Pricing Improves 5.1 Percent;
Pricing Momentum Also Continues for Cement, Ready Mixed Concrete and Asphalt
Martin Marietta Materials, has announced results for the third quarter ended September 30, 2017.
Highlights Include the Following Third-Quarter Results:
(All comparisons are versus prior-year third quarter)
- Consolidated net sales of $1.022 billion compared with $1.038 billion
- Building Materials business net sales of $963.6 million compared with $978.1 million
- Magnesia Specialties net sales of $58.5 million compared with $60.2 million
- Consolidated total revenues of $1.088 billion compared with $1.104 billion
- Consolidated gross profit of $291.7 million compared with $293.3 million
- Consolidated earnings from operations of $227.0 million compared with $242.7 million
- Net earnings attributable to Martin Marietta of $151.5 million compared with $159.5 million
- EBITDA of $302.0 million compared with $322.8 million
- Earnings per diluted share of $2.39 compared with $2.49
Ward Nye, Chairman, President and CEO of Martin Marietta, stated, "Our third-quarter results reflect our ability to adapt to external challenges and deliver solid operating results. While Hurricanes Harvey and Irma unquestionably impacted our business, negatively affecting revenues and profitability, weather-related events are short-term in nature and dislocations or delays are subsequently resolved. Furthermore, the attractive markets in which Martin Marietta operates are experiencing record employment levels. As a result, many contractors are facing a skilled labor shortage, requiring them to accept a slower, yet steadier, pace of project work often with multi-year backlogs. State Departments of Transportation (DOT) in several of our key states are also understaffed relative to the influx of new projects and, as a result, projects have been delayed.
"Notably, we achieved solid pricing growth across all product lines and segments and a 180-basis-point expansion in aggregates product line gross margin despite these externally-driven volume headwinds. Notwithstanding weather, the Company achieved record quarterly earnings per diluted share, excluding nonrecurring repair costs related to certain of the Company's leased railcars. These results underscore the importance of attractive market fundamentals, the pricing power of our business and our continued focus on operational excellence.
"We remain confident in Martin Marietta's long-term outlook, with the fundamental drivers for broad-based construction activity supporting a steady and extended, yet somewhat slower than anticipated, cyclical recovery across our geographic footprint. The United States is experiencing the third longest construction recovery since the Great Depression, and we see this recovery continuing for the next several years. The building blocks to address the undeniable need for significant investment exist; however, we have yet to see meaningful growth in heavy construction activity, particularly in the public arena. Positive momentum in residential and nonresidential construction has been offset by lackluster infrastructure activity, which continues to be significantly hindered by project delays and uncertainty concerning regulatory and other related reform. As a result, we expect aggregates shipments will continue its steady growth through the extended recovery."
Mr. Nye concluded, "Looking ahead, our leading positions in many of the nation's most attractive and otherwise vibrant markets should allow Martin Marietta to capitalize on the durable, multi-year construction recovery. Our customers maintain positive near- and medium-term outlooks, as supported by their reported strong backlogs. We stand to benefit from the expected increased demand for infrastructure projects and private-sector construction activity as regulatory reform emerges and state DOTs and customers address labor constraints. We are committed to further enhancing long-term shareholder value, with a relentless focus on world-class safety standards, diligent cost discipline, operational excellence and strategic growth initiatives."
Mr. Nye's CEO Earnings Commentary and Market Perspective can be found on the Investor Relations section of the Company's website.
Operating Results
(All comparisons are versus the prior-year period unless noted otherwise)
Building Materials Business
Third-quarter 2017 total revenues for the Building Materials business, which includes the aggregates, cement, ready mixed concrete and asphalt and paving product lines, were $1.024 billion, down slightly from $1.039 billion. Average selling prices improved across all product lines and segments despite lower shipment volumes. The aggregates product line average selling price improvement of 5.1 percent was led by a 9.6 percent increase in the Southeast Group. The Mid-America Group and West Group reported increases of 6.2 percent and 1.1 percent, respectively. The cement product line generated pricing growth of 3.9 percent, driven by ongoing construction activity in the Dallas/Fort Worth area. Ready mixed concrete and asphalt pricing increased 4.9 percent and 11.8 percent, respectively.
Aggregates product line shipments decreased 3.2 percent compared with the third quarter of 2016, driven by ongoing project delays, customer- and DOT-related labor constraints, government uncertainty and near-record precipitation compounded by major hurricane and tropical storm activity. The West Group's shipments decreased 6.8 percent and were most negatively affected by wet weather, notably in Texas where third quarter 2017 marked the fourth wettest third quarter in the last 123 years. The Southeast Group overcame the impact of Hurricane Irma and other storms, reporting aggregates volume growth of 4.7 percent, driven by strong residential and nonresidential construction activity. Total cement shipments decreased 9.7 percent. Ready mixed concrete and asphalt shipments decreased 13.1 percent and 10.7 percent, respectively.
Infrastructure Market Highlights
- The infrastructure market comprised 42 percent of third-quarter aggregates product line volumes, which remains below the Company's most recent five-year average. Continued underinvestment in the nation's infrastructure, coupled with marginal infrastructure construction activity from the Fixing America's Surface Transportation Act (FAST Act) and ongoing project delays, resulted in declining infrastructure shipments.
Nonresidential Market Highlights
- The nonresidential market represented 32 percent of aggregates product line shipments and overall nonresidential shipments were relatively flat for the third quarter. Volumes were driven primarily by office, retail and warehouse projects along interstate corridors as the Company awaits the start of the next round of major energy-sector construction projects along the Gulf of Mexico.
- The Mid-America and Southeast Groups reported strong industrial construction growth. Consistent with management's expectations, the West Group reported a decline in nonresidential shipments due to the completion of several large energy-related projects in 2016 that were not immediately replaced in 2017. Management expects the next wave of these projects to bid in 2018.
Residential Market Highlights
- The residential market accounted for 19 percent of third-quarter aggregates product line shipments, which increased 4 percent, driven by continued strength in housing across the Company's geographic footprint, particularly in the southeastern United States.
- Texas, Florida, North Carolina, Georgia, South Carolina and Colorado, key geographies for the Building Materials business, comprised six of the top ten states for growth in single-family housing unit starts as of September 2017.
ChemRock/Rail Market Highlights
- The ChemRock/Rail market accounted for the remaining 7 percent of aggregates product line volumes and declined versus the prior-year quarter.
Magnesia Specialties Business
Third-quarter 2017 total revenues for the Magnesia Specialties business were $63.9 million, a decrease of 1.9 percent from $65.1 million, with declines in both the chemicals and lime product lines. Gross profit decreased $2.9 million due to kiln outages, coupled with higher energy and maintenance costs.
Consolidated Operating Results
Selling, general and administrative (SG&A) expenses were 5.3 percent of total revenues, reflecting the impact of weather and other delays on revenues.
On a year-to-date basis, the estimated effective income tax rate was 26.2 percent, reflecting a 130-basis-point benefit from excess tax benefits associated with option exercises and vesting of stock-based compensation awards. Effective January 1, 2017, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires excess income tax benefits and tax deficiencies to be recorded in tax expense, as a discrete event, in the period shares are issued or options are exercised.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended September 30 was $418.4 million in 2017 compared with $421.7 million in 2016.
Property, plant and equipment additions for the nine months ended September 30, 2017 were $308.7 million, reflecting the continued strategic deployment of capital into the business, including mobile fleet purchases that will reduce maintenance and repair costs. Full-year capital spending is expected to range from $450 million to $500 million.
At September 30, 2017, the ratio of consolidated debt-to-consolidated EBITDA, as defined in the applicable credit agreement, for the trailing-12 months was 1.74 times.
Capital Allocation Priorities Enhance Shareholder Value
Martin Marietta is dedicated to maintaining disciplined capital allocation to further enhance shareholder value. The Company's unchanged capital allocation priorities include the right acquisitions that enable the successful execution of the Company's strategic growth plan, organic capital investment, and the return of cash to shareholders through a meaningful and sustainable dividend and share repurchases.
Consistent with these objectives, the Company's previously-announced acquisition of Bluegrass Materials Company, the largest privately-held, pure-play aggregates business in the United States, is expected to close in the first half of 2018 subject to the customary regulatory process and other closing conditions. Furthermore, in August 2017, Martin Marietta increased its annual cash dividend by 5 percent. The Board of Directors of Martin Marietta previously authorized a share repurchase program under which the Company may acquire up to 20 million shares of its outstanding common stock. Since announcing its repurchase authorization in February of 2015, the Company has repurchased 5.3 million shares and, including the payment of dividends, returned $1.18 billion to shareholders. As of September 30, 2017, there were 62.9 million shares of Martin Marietta common stock outstanding and 14.7 million shares remaining under the current repurchase authorization.
Pending Bluegrass Materials Acquisition
As previously announced on October 19, 2017, Martin Marietta committed to certain timelines with the United States Department of Justice (DOJ) pursuant to which the Company has agreed (1) not to consummate the Bluegrass Materials acquisition before the end of January 2018, unless the DOJ has completed its investigation and has issued any related orders prior to that date, and (2) not to certify substantial compliance with the DOJ's previous request for additional information and documentary material relating to the acquisition before November 9, 2017. Bluegrass Materials also made the same commitments to the DOJ on the same terms.
Martin Marietta and Bluegrass Materials are continuing to work closely and cooperatively with the DOJ in its review of the proposed transaction. The parties currently anticipate that the proposed acquisition will be completed in the first half of 2018.
Full-Year 2017 Outlook
Martin Marietta remains optimistic about the Company's long-term outlook given its continued ability to successfully execute its strategic business plans and the largely positive trends in the markets it serves. Given the skilled labor shortage, project delays and government uncertainty that has limited growth throughout the year, management has revised its guidance for full year 2017 as follows:
- Aggregates product line end-use markets compared with 2016 levels are as follows:
- Infrastructure market to decrease in the mid-single digits.
- Nonresidential market to remain relatively flat.
- Residential market to increase in the high-single digits.
- ChemRock/Rail market to decrease in the low-double digits.
Preliminary View of 2018
The fundamental drivers for the Company's expected growth remain intact as the current broad-based recovery continues on a steady and extended basis. Even with a construction-centric phase of the economic expansion, given the shortage of skilled labor and project delays, the pace of construction activity has been slower. Notably:
- As state DOTs and contractors address labor constraints and regulatory reform emerges, infrastructure construction should begin to see benefits from the funding provided by the FAST Act. Additionally, state and local initiatives that support infrastructure funding, including gas tax increases and other ballot initiatives passed over the previous 24 months, are expected to grow and continue to play an expanded role in public-sector activity.
- Nonresidential construction is expected to modestly increase in both the heavy industrial and commercial sectors; Dodge forecasts continued nonresidential growth for the next several years. Additional energy-related economic activity, including follow-on public and private construction, will be mixed. While the pace of permitting and final investment decisions has slowed, management expects new energy-related projects should enter the bid phase in 2018 with construction activity in 2019 and beyond.
- Residential construction is expected to continue growing, particularly in key Martin Marietta markets, driven by employment gains, historically low levels of construction activity over the previous years, low mortgage rates, higher lot development, and higher multi-family rental rates. Notably, six of Martin Marietta's key states - Texas, Florida, North Carolina, Georgia, South Carolina and Colorado - rank in the top ten for single-family housing unit permits.
Management's preliminary view of 2018 anticipates aggregates shipments to increase in the mid-single digits as long as the forces that have limited growth (i.e., labor constraints, governmental/legislative uncertainty) remain in place. Further, management expects faster expansion in the West and Southeast Groups and comparatively slower growth in the Mid-America Group, which historically has generated the Company's highest margins. This preliminary outlook excludes any impact from the pending acquisition of Bluegrass Materials and any benefit from a potential increase in federal infrastructure spending.
Risks to Outlook
The outlook includes management's assessment of the likelihood of certain risks and uncertainties that may affect performance, including but not limited to: both price and volume, and a recurrence of widespread decline in aggregates volume negatively affecting aggregates price; the termination, capping and/or reduction of the federal and/or state gasoline tax(es) or other revenue related to infrastructure construction; a significant change in the funding patterns for traditional federal, state and/or local infrastructure projects; the United States Congress' inability to reach agreement among themselves or with the current Administration on policy issues that impact the federal budget; the volatility in the commencement of infrastructure projects; a reduction in defense spending, and the subsequent impact on construction activity on or near military bases; a decline in nonresidential construction; a further decline in energy-related construction activity resulting from a sustained period of low global oil prices or changes in oil production patterns in response to this decline and certain regulatory or other economic factors; a slowdown in the residential construction recovery; a reduction in economic activity in the Company's Midwest states resulting from reduced funding levels provided by the Agricultural Act of 2014 and a sustained reduction in capital investment by the railroads; an increase in the cost of compliance with governmental laws, rules and regulations; construction labor shortages and/or supply-chain challenges; and unexpected equipment failures, unscheduled maintenance, industrial accident or other prolonged and/or significant disruption to its cement and/or its Magnesia Specialties production facilities. Further, increased highway construction funding pressures resulting from either federal or state issues can affect profitability. If these negatively affect transportation budgets more than in the past, construction spending could be reduced. Cement is subject to cyclical supply and demand and price fluctuations. The Magnesia Specialties business essentially runs at capacity; therefore, any unplanned changes in costs or realignment of customers introduce volatility to the earnings of this segment.
The Company's principal business serves customers in construction markets. This concentration could increase the risk of potential losses on customer receivables; however, payment bonds normally posted on public projects, together with lien rights on private projects, mitigate the risk of uncollectible receivables. The level of demand in the Company's end-use markets, production levels and the management of production costs will affect the operating leverage of the Building Materials business and, therefore, profitability. Production costs in the Building Materials business are also sensitive to energy and raw material prices, both directly and indirectly. Diesel fuel, coal, and other consumables change production costs directly through consumption or indirectly by increased energy-related input costs, such as steel, explosives, tires and conveyor belts. Fluctuating diesel fuel pricing also affects transportation costs, primarily through fuel surcharges in the Company's long-haul distribution network. The Magnesia Specialties business is sensitive to changes in domestic steel capacity utilization as well as the absolute price and fluctuation in the cost of natural gas.
Transportation in the Company's long-haul network, particularly the supply of rail cars and locomotive power and condition of rail infrastructure to move trains, affects the Company's efficient transportation of aggregates products in certain markets, most notably Texas, Colorado, Florida, North Carolina and the Gulf Coast. In addition, availability of rail cars and locomotives affects the Company's movement of essential dolomitic lime for magnesia chemicals, to both the Company's plant in Manistee, Michigan and its customers. The availability of trucks, drivers and railcars to transport the Company's products, particularly in markets experiencing high growth and increased demand, is also a risk and pressures the associated costs.
All of the Company's businesses are also subject to weather-related risks that can significantly affect production schedules and profitability. The first and fourth quarters are most adversely affected by winter weather. Hurricane activity in the Atlantic Ocean and Gulf Coast generally is most active during the third and fourth quarters. In fact, in August and September 2017, respectively, Hurricanes Harvey and Irma generated winds and significant amounts of rainfall which disrupted operations in Texas, Louisiana, Florida, Georgia and the Carolinas. However, after flood waters recede, management expects an increase in construction activity as roads, homes and businesses are repaired.
Risks to the outlook also include shipment declines resulting from economic events beyond the Company's control. In addition to the impact on nonresidential and residential construction, the Company is exposed to risk in its estimated outlook from credit markets and the availability of and interest cost related to its debt.
The Company's future performance is also exposed to risks from tax reform at the federal and state levels.
Non-GAAP Financial Information
This press release contains financial measures that have not been prepared in accordance with GAAP — EBITDA and the ratio of consolidated debt-to-consolidated EBITDA, as defined in the applicable credit agreement. Tables reconciling these non-GAAP financial measures for the respective periods are included in the appendix to the press release.
Conference Call Information
The Company will discuss its third-quarter 2017 earnings results on a conference call and an online web simulcast today (November 2, 2017). The live broadcast of the Martin Marietta conference call will begin at 11:00 a.m. Eastern Time today. An online replay will be available approximately two hours following the conclusion of the live broadcast. A link to these events will be available at the Company's website. Additionally, the Company has posted supplemental financial information related to its third-quarter performance on its website. For those investors without online web access, the conference call may also be accessed by calling (970) 315-0423, confirmation number 2189214.
